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144 Billion Reasons to Buy Amazon

Amazon Prime is enormously valuable for investors in the online-retail juggernaut.

Amazon.com(NASDAQ:AMZN) is the undisputed king in online retail, and its Amazon Prime program is a major success driver for the company. According to a recent report from Cowen and Company, Prime customers could be worth as much as $144 billion for Amazon.

Crunching the numbers

Amazon does not disclose how many Amazon Prime members it has, but different research companies have their own estimates based on clues from the online retailer and their own surveys. Consumer Intelligence Research Partners calculates that Amazon Prime has 63 million global members as of June 2016, growing by 43% year over year.

Cowen and Company has a more moderate estimate, calculating that Amazon has 49 million members in the U.S. alone. The research firm believes that growth is gaining momentum, as Amazon reportedly gained 12 million subscribers in 2016, versus 10 million in 2015 and 7 million in 2014. In terms of market penetration, Cowen and Company believes that nearly 50% of U.S. households could be Amazon Prime customers by the end of 2016.

Amazon's Prime members buy more often from the company, and they also tend to spend more money on Amazon purchases per month. Based on this survey, Prime members make, on average, 3.5 purchases a month versus 2.3 transactions monthly from nonmembers. The average spend per month is estimated at $193 for members and $138 for nonmembers.

Members also produce subscription income for Amazon, but they generate higher expenses in areas such as fulfillment costs. After incorporating all these factors, Cowen and Company estimates that Amazon makes $36.39 in after-tax profits per month on Prime subscribers, versus $20.37 per month on customers who are not members.

Projecting those profits over an estimated membership lifetime of 167 months, the calculated lifetime value of a single Prime member reaches $2,960, which equals $143.8 billion on an estimated membership base of 48.6 million subscribers.

Why Amazon Prime is key

Mathematical considerations aside, Amazon Prime is a crucial growth driver for Amazon, and one of the main factors in why the company has been so successful over the past several years.

The service offers a bundle of benefits for subscribers, such as free shipping, access to Amazon's music-streaming library, and a growing online collection of TV shows and movies, among others. The annual cost of $99 is remarkably compelling to customers. In the words of Amazon founder and CEO Jeff Bezos: "We want Prime to be such a good value, you'd be irresponsible not to be a member."

Once customers become Prime members, they are more likely to choose Amazon over other retailers when buying all kinds of products. This has major positive implications for the company, not only from a financial perspective, but also from a competitive point of view.

Amazon has gained a lot of market share from traditional brick-and-mortar retailers over the past several years, and Prime has clearly been a powerful weapon for the company in the battle.

According to Cowen and Company, Amazon Prime could be stealing market share away from traditional warehouse retailers such as Costco Wholesale(NASDAQ:COST) and Wal-Mart's (NYSE:WMT) Sam's Club. The research firm calculates that among the three companies, the percentage of U.S. households subscribing only to Amazon Prime has increased from 7.1% in 2013 to 16.2% in 2016. In contrast, customers who subscribe only to Costco declined from 14.9% to 9.8%, and those subscribing only to Sam's Club fell from 16.9% to 9.7% in the same period.

These numbers may indicate that Amazon Prime is gaining market share from Costco and Sam's Club in the warehouse retail market, or that Amazon is attracting new customers to the warehouse membership market. In any case, one thing is quite clear: Amazon Prime is tremendously valuable for Amazon in terms of gaining market share in the retail business, versus both traditional retailers and warehouse operators.

At the end of the day, the true value of Amazon Prime goes far beyond the money Amazon is currently making on its subscribers. Prime is allowing the company to consolidate its position as the undisputed growth leader in the retail industry across the board, which is invaluable for investors in the company over the years and even decades ahead.

Andrés Cardenal owns shares of Amazon.com. The Motley Fool owns shares of and recommends Amazon.com and Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Author

Andres Cardenal, CFA is a tenacious researcher of the best investment opportunities around the world. Andres is an economist and CFA Charterholder living in Buenos Aires, Argentina. Naturally flavored.
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